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Purpose of each control & impact on substantive tests

The following questions might be addressed in an evaluation of internal controls for fixed assets. For each question:
a. Indicate the purpose of the control.
b. Indicate the impact on the substantive audit procedures if the answer to the question indicates weak controls.

Internal Control Questions
1. Does the client periodically take a physical inventory of property and reconcile to the property ledger?
2. Does the client have a policy manual to classify property and assign an estimated life for depreciation purposes to the class of assets?
3. Does the client have a policy on minimum expenditures before an item is capitalized? If yes, what is the minimum amount?
4. Does the client have a mechanism to identify pieces of equipment that have been designated for scrap? If yes, is it effective?
5. Does the client have an acceptable mechanism to differentiate major renovations from repair and maintenance? If yes, is it effective?
6. Does the client regularly self-construct its own assets? If yes, does the client have an effective procedure to appropriately identify and classify all construction costs?
7. Does the client systematically review major classes of assets for potential impairment?
8. Does management periodically review asset disposal or the scrapping of assets as a basis for reviewing the assignment of estimated life for depreciation purposes?

Solution Preview

1. Does the client periodically take a physical inventory of property and reconcile to the property ledger?

a. Indicate the purpose of the control.

Reconciliations should detect if purchases and sales are being recorded properly and assets are safeguarded from loss.

b. Indicate the impact on the substantive audit procedures if the answer to the question indicates weak controls.

If there are no reconciliations, any errors may not be detected or fixed quickly during the period. Thus, there would need to be more testing of the recording of purchases and sales and counting of ending balances than if the control was in place.

2. Does the client have a policy manual to classify property and assign an estimated life for depreciation purposes to the class of assets?

a. Indicate the purpose of the control.

The purpose is the increase the guidance about how to classify assets and choose an appropriate asset life for assets. This improves the quality of the capitalizing of the assets by making sure the assets are consistently recorded and depreciated and make sure only assets that meet the criteria for capitalizing are recorded as assets.

b. Indicate the impact on the substantive audit procedures if the answer to the question indicates weak controls.

If this control is not in place, there may be assets that have been expensed or expenses that have been capitalized. Also, asset lives may not be reasonable. So, there would be more testing of newly capitalized assets (to be sure they should be capitalized at all and that they are in the right asset category and that their lives are reasonable and consistent with other similar assets). And there would be reviewing of ...

Solution Summary

Your tutorial is 876 words and gives you a reason for each control and then the testing that you would do if the control was either not in place or not implemented (wasn't being done).

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